Out-Law Analysis | 21 Oct 2016 | 3:03 pm | 2 min. read
This is a point I made at Fintech 2016, a conference which took place recently at Our Dynamic Earth in Edinburgh, where speakers included Bob Ferguson, head of Project Innovate at the Financial Conduct Authority (FCA), Nutmeg co-founder Nick Hungerford, one of the UK’s best-known fintech entrepreneurs, and Graeme Jones, chief executive of Scottish Financial Enterprise.
Recent developments with blockchain, or distributed ledger technologies, and debate over its future regulation, echo challenges law makers faced in the late 1990s when addressing the rise of internet companies and e-commerce.
In response to services moving online, EU law makers created legislation to regulate so-called information society services, a technologically neutral term intended to apply to online intermediaries. The concept has since been enshrined in long-standing EU legislation, such as the E-Commerce Directive.
However, the problem with the EU's approach at the time was that, as new businesses and innovative business models emerged, there was uncertainty over which companies were to be considered as providers of information society services and therefore subject to the EU rules.
It took until 2010 for the Court of Justice of the EU (CJEU) to clarify that an "internet referencing service", or search engine, constitutes an information society service.
In financial services, EU laws are more prescriptive about which intermediaries they apply to. For instance, there are specific rules that apply to institutions involved in payments and post-trading activities in securities markets including clearing, settlement, asset servicing and reporting.
Blockchain, may offer the potential for payments and other exchanges of data, information or assets, to be completed without the involvement of the intermediaries that exist today. But such arrangements require a rethink from policy makers on how those intermediaries can be replaced in a way that enables the rulebooks to continue to operate effectively. Negotiating regulatory change of this scale is not a task which should be underestimated.
While this approach should focus closely on regulating 'the who', policy makers need to adopt another approach in relation to digital currencies.
Regulators across the world appreciate that they will need to, at some point in the future, take a more definitive and consistent stance on the regulatory challenges which digital currencies present. The temptation is to fail to address the first challenge – answering the question of 'what' is being regulated, and push ahead with regulation unfit for the purpose for which it is to be used.
From an economic perspective, it is often said that money fulfils three roles – it is a reliable 'store of value', it can be used as a 'medium of exchange' and it also acts as a 'unit of account'. In that it can be created by private banks, it is broader than 'currency' which is issued in the form of banknotes and coins by sovereign states, and different from 'e-money' – a digital representation of money, which does not otherwise have a life of its own.
Regulators have begun to focus on specific regulatory challenges: The cross-border reach of digital currencies and anonymity features which could have a negative impact on financial integrity; the tax implications of buying and selling digital currencies; consumer protection and the ability to bypass national capital controls.
But before these questions can be answered, a clearer discussion of the positives and negatives of defining digital currencies in a consistent way first needs to be given more attention. If it does not, there is always the threat that definitions hard-wired into legislation for specific contexts will be applied to others and lead to unintended consequences.
Luke Scanlon is an expert in financial services and technology at Pinsent Masons, the law firm behind Out-Law.com.